Effects of fare control

Government has the tendency to throw its weight around, especially affecting people and private enterprises that it regulates. If players are deemed “friends” or crony of the administration in power, they enjoy kidglove treatment, allowing them to get off lightly in terms of penalties and fines. Otherwise, if the players are outside the circle, they get hefty fines or threatened with closure.

When Uber was still operating in the Philippines, the Land Transportation Franchising and Regulatory Board (LTFRB) slapped it with multiple penalties: (a) Suspension of operation for about a month or two, ( b) a fine of P190 million, and (c) required Uber to give allowances to their drivers while the suspension was in effect.

Taken together, these fines plus legal costs have been estimated to reach P500 million or higher, a huge amount. Last week, the LTFRB fined

Grab P10 million for charging two pesos per minute on trips taken by its passengers, saying that it didn’t approve these fees.

Meanwhile, passengers have agreed — and continue to agree — to pay for these fares, even before they take trips using ride-sharing platforms, including Grab.

If passengers are unable to afford ride-sharing services, they have the option to take regular taxis, UV expresses, or a combination of other modes of transport.

Most commuters have refrained from using ride-sharing services owing to their cost. Only about 2.7% of the total number of commuters use ride-sharing.

FARE CONTROL

The LTFRB uses two price control policies: (a) surge price control to twice the fare amount, which was later cut down to 1.5x, and ( b) abolition of P2/minute charge as a mechanism to offset the big decline in (a).

We now try to show the effect of these two measures on both passengers and drivers.

In the graph below, Pm and Pc means Market Price and Controlled/Capped Price. Likewise, Qm and Qc means Market Quantity and Controlled/Capped Quantity.

When there is no price control, when Pm prevails, passengers and drivers agree at point A and passengers get a ride soon, resulting in short waiting times.

When price control is imposed, when Pc prevails, those policies remove incentives of many drivers to go to high traffic areas to pick up passengers. This reduces the supply of drivers during the times when they are most needed and makes the supply curve shift from D1 to D2.

Passengers’ waiting times become longer, prompting some of them to take regular taxis — assuming these are readily available — or take multiple transport modes to reach their destinations.

So passengers’ demand curve also adjusts to the left, from D1 to D2. Only those desperate to get a